Investment Highlights

• We maintain BUY on Dialog Group with an unchanged sum-ofparts-based (SOP) fair value of RM4.85/share, which implies an FY22F PE of 37x — 1 standard deviation above its 5-year average of 32x. Our SOP maintains the 650-acre Pengerang buffer land valuation at RM80 psf.
• We retain Dialog’s forecasts as its FY20 core net profit of RM602mil (+12% YoY) was in line with our expectations and consensus. For core profit comparison, we have excluded Dialog’s 1QFY20 fair value gain of RM29mil from the acquisition of another 25% stake in Halliburton Bayan Petroleum to 75%.
• With the higher earnings, Dialog raised its final dividend to 1.9 sen (+0.7 sen QoQ), bringing the full FY20 dividend to 3.1 sen. However, this is 18% below FY19 dividend as the group is still actively managing its cost reduction and cash conservation policies against the ongoing Covid-19 pandemic headwinds.
• Earnings growth for FY21F onwards will be driven by the fullyear contribution of Pengerang Phase 1E's 430K m3 storage, which commenced operation in 3Q2019, and Tanjung Langsat 3 terminal's initial 120K m3 capacity, of which half commenced in October 2019 and the rest in January 2020.
• Tank terminal rates, up by 30%–40% from end-CY19 to S$6.50– S$7/m3 currently, will continue to support the earnings of 10% of Pengerang Phase 1's 650K m3 storage, which are on spot charters of up to 3 months.
• However, this could be partially offset by the contract renewal of the group's 30%-owned Kertih tank terminal for another 10 years by Petronas at a rate which could be lower by 10%-20%.
• Within 12 months, Tanjung Langsat 3's balance 85,000 m3 will be operational while another 100,000m3 will commence in 2022. Thereafter, the group still has ample acreage to double its Pengerang storage capacity with a remaining 500-acre zone comprising reclaimable land and the adjoining buffer zone.
• Despite the MCO and border restrictions, Dialog’s 4QFY20 core net profit still rose 4% QoQ to RM157mil mainly due to higher contribution from the wholly-owned Tanjung Langsat 3’s initial 120K m3 contribution and higher spot charter rates, which also drove the Malaysian operation’s revenue by 27% QoQ. Slightly boosted by a 3ppt QoQ decline in effective tax rate, this commendable performance was partly offset by a RM20mil unrealised forex loss at the group’s 25%-owned Pengerang LNG terminal, causing associate pre-tax profit to drop 26% QoQ.
• Dialog currently trades at a FY22F PE of 29x – below its 5-year peak of 39x. We view its higher-than-peer premium as justified given Dialog’s long-term recurring cash flow-generating businesses underpinned by the Pengerang development’s multi-year value re-rating bonanza and low net gearing levels.

Source: AmInvest Research - 19 Aug 2020